It's time to put the RUT monthly Iron Butterfly back into the trading plan.
Beginning with the October cycle, I will be recommending a monthly Iron Butterfly on RUT. The planned entry date is 31 - 30 days prior to expiration, so the approximate entry date will be September 16 - 17.
- Wait at least one hour after market open before entering. Exact entry time is trader's choice.
- Look at economic news for the day. If there is potentially market moving news being announced, do not enter the trade in advance of the news release.
- If the price of RUT moves +/- a one-day, one standard deviation, do not enter the trade until the movement is less than a one-day, one standard deviation.
- Enter even strikes only. Even strikes tend to have higher open interest than the odd strikes. Additionally, sometimes the odd strikes are not available when you have to adjust.
The trade is a 50 point wide, "at the money" Iron Butterfly. As an example, if the price of RUT was 1170, the order would be:
SELL October 1170 Call.
BUY October 1220 Call.
SELL October 1170 Put.
BUY October 1120 Put.
Credit will vary depending on on the price of RUT and the volatility at the time the trade is entered.
Planned maximum capital allocation is $5,000 per contract (width of the wings). In a Reg-T account, your broker will hold the $5,000 less credit received as maximum margin/risk and option buying power. (Example: $5,000 margin less $2,500 credit = $2,500 buying power effect before commissions).
Target gain is 5 percent of planned maximum capital, or $250 per contract. Trade is to be exited if a 10% loss (again, based on maximum allocated capital), or $500 per contract.
The basic trade management guidelines are as follows:
Try to adjust once per day whenever possible, I usually wait until the end of the day unless the market is moving very quickly.
- When the price of RUT moves up or down 10 points from the center strike of the Iron Butterfly, roll the "threatened" side up 20 points if it is an upside move, or down 20 points if it is a downside move. This results in a 20 point wide Iron Condor. This adjustment is made in one order; it is a Condor Roll of all calls or all puts, depending on the side being adjusted. At times, depending on the strength of the move, it may be recommended to further reduce the upside risk by moving in the long wings 10 points at the time of the adjustment. This would then make the wing width 40 points on the call side.
After the first adjustment is made:
- If price movement continues in same direction another 10 points, roll threatened side up or down another 20 points.
- If price movement reverses back to 10 points from the original center of the Iron Butterfly, roll the threatened side up or down another 20 points.
Note: Occasionally on the second adjustment, it is sufficient to roll 10 points rather than 20. This will depend on length of time in the trade and current market conditions at the time of the adjustment trigger.
If you have questions on the basic trade setup, please send me an email. Trade entry recommendations will be posted the day prior to entry, as well as suggested adjustments throughout the cycle of the trade.
It is always a good idea to paper trade any new strategy before putting on a live position. It's very important to have a complete understanding of any trade, including adjustments, before putting one's own money in the position.
As always, stay keen on your risk management and trade carefully,